How different types of SMSF must claim ECPI

What is ECPI ECPI = exempt current pension income

Reduces a fund’s assessable income

Eligible if have a retirement phase income stream and minimum pension standards met

ECPI applies to assessable income including net capital gains, excluding non-arm’s length income and assessable

contributions

ECPI is calculated annually

Claimed in the SMSF annual return at

Section A item 10

Section B Item 11Y

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It all depends on ECPI…

How a fund claims ECPI impacts capital gains and losses, expense deductibility and tax

losses and depends on the type of fund.

Today we are going to consider the key fund types for ECPI:

1. A fund which always has a non-retirement phase account during the year

2. A fund which is solely in retirement phase over the entire year

3. A fund which has periods where it is solely in retirement phase but at other times also has a non-

retirement phase account

4. A fund with assets elected to be segregated

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A fund which always has a non-retirement phase account

Good Life Super Fund

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Good Life Super Fund

Mark & Susan are completing their 2018-19 SMSF annual return

Mark had opening ABP balance $839,420 and made payment of $33,600 on 15 July

Susan had opening accumulation balance of $404,225 and received concessional contributions

of $5,000 on 1 Sept and 1 Dec, and $7,500 on 1 Mar and 1 Jun

$40,000 capital gain, $25,455 other assessable income, $6,000 in expenses and a $1,500 tax loss

carried forward

This is a fund which always has a non-retirement phase account

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SMSF which always has a non-retirement phase account Claim ECPI using the proportionate method in Section 295.390 of ITAA 1997

Applies when a fund is not solely supporting retirement phase accounts

Trustee requires an actuarial certificate if want to claim ECPI (optional)

Actuarial certificate is for a full income year and states the exempt income proportion

ECPI = exempt income proportion x assessable income

Assessable income excludes non-arm’s length income and assessable contributions and includes net

capital gains

Proportionate method is most commonly used until a fund is solely in retirement phase

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Susan’s accumulation

Mark’s account-based pension

July 2018 June 2019

2018/19

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Good Life Super Fund capital gains Fund had $40,000 net capital gain due to sale of fund assets in 2018-19

Proportionate method: timing of when gains/losses received will not impact how

are taxed

A net capital loss is carried forward to offset future capital gains (can’t offset

against income)

A net capital gain is included in assessable income and actuarial exempt income

proportion will apply

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Good Life Super Fund calculating ECPI Actuarial exempt income proportion = 66.157%

$25,455 in assessable income excluding assessable contributions in 2018-19

$40,000 net capital gain due to sale of fund assets

Assessable income including net capital gain and excluding assessable contributions

= 40,000 + 25,455 = $65,455

ECPI = 0.66157 x 65,455 = 43,303.06

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Maximising proportionate method ECPI

Exempt income proportion =

This uses a daily weighted average average so when a transaction occurs is important

More in retirement phase on average:

Pension payments and lump sums later in a year

Pension commencements earlier in a year

Less in non-retirement phase on average:

Accumulation withdrawals earlier in a year

Contributions later in a year

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average value of retirement phase liabilities

average value of superannuation liabilities

Good Life Super Fund calculating ECPI If instead had made contributions and pension payments on 15 June 2018…

Actuarial exempt income proportion = 67.408%

Previously was 66.157%

Not much in this case but…

Biggest improvement will come with timing of one off material transactions such as pension commencements, lumpy withdrawals or rollovers

Maximise exempt income proportion to maximise exempt income on capital gains

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Expenses that are ordinarily deductible

Claimed as a tax deduction to extent incurred in producing assessable income

Section 8.1 of ITAA 1997 unless a specific deduction such as Section 25-5 applies

TR 93/17 also sets out general principles

Expenses of a capital nature cannot be claimed as a deduction under Section 8.1

Some expenses are fully deductible e.g. managing the fund’s tax affairs

√ Actuarial certificate fees

√ Supervisory levy

√ Costs relating to preparation and lodgment of the annual return

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Deductibility of expenses

Distinct and severable expenses

Directly incurred in producing assessable income = entirely deductible

Directly incurred in producing exempt income = not deductible at all

Expenses incurred in producing both assessable and exempt income

Must be apportioned on a fair and reasonable basis

Deductible to extent incurred in producing assessable income

Common methods:

Actuarial method of (1 – exempt income proportion)

TR 93/17 method of assessable income / total income

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Deductibility of expenses

Good Life Super Fund expenses $5,000 in general administrative expenses, $1,000 in deductible expenses

Expenses fully deductible: $1,000

Expenses which must be apportioned: $5,000

Have been using actuarial method to claim a deduction on expenses which are apportioned:

Expense deductibility = 1 - exempt income proportion = 1 – 0.66157 = 33.843%

Deductions = 1,000 + 5,000 x 0.33843 = $2,692.15

Total deductions = $2,692.15 Total non-deductible expenses = $3,307,85

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Utilising tax losses A tax loss occurs when total deductions exceed total assessable income

Is carried forward to be claimed as a tax loss deduction in following year

To claim a tax loss deduction at Section C Item 12 M1 of the annual return:

1. Calculate net ECPI – this is ECPI less expenses incurred in deriving exempt income

2. Reduce tax loss carried forward by net ECPI

3. Any remaining amount can be claimed as Tax losses deducted

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Good Life Super Fund utilise tax losses

Carried forward tax loss of $1,500

1. Net ECPI = ECPI – non-deductible expenses = 43,303 - 3,308 = 39,995

2. Tax loss – net ECPI = max(1,500 – 39,995, 0) = 0

3. Tax losses deducted = 0

For a fund with a retirement phase account it is common for tax losses deducted to be $0.

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A fund that always has a non-retirement phase account during the year Will use the proportionate method to claim ECPI

A net capital gain will have the exempt income proportion apply

A net capital loss can be carried forward

General administrative expenses must be apportioned and claimed as a deduction to the extent were

incurred on assets producing assessable income

Tax losses carried forward must be offset by net ECPI before claiming as a deduction

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A fund which is solely in retirement phase over the whole year

JR Super Fund

JR Super Fund Consider that Joe had ABP balance of $3.1m in the JR Super Fund prior to 1 July 2017

There were a few options for what Joe could have done with his excess $1.5m…

1. Withdraw it from super altogether

2. Keep it in super but roll it over to a new SMSF solely in accumulation

3. Keep it in super in the JR Super Fund as an accumulation interest

Under option 3 would have a fund always had a non-retirement phase interest

Consider option 1 and 2 and assume the JR Super Fund is solely in retirement phase

$1.6m in JR Super Fund in an ABP at 1 July 2017

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A fund solely in retirement phase Segregated pension assets are assets solely supporting retirement phase liabilities

Claim ECPI using the segregated method in Section 295.385 of ITAA 1997

Don’t need an actuarial certificate

Income on segregated pension assets is ECPI (100% exempt)

Capital gains and losses are disregarded and not included in assessable income

General expenses are not deductible as incurred on assets producing exempt income

Except: if the fund has disregarded small fund assets it cannot use the segregated method.

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New annual assessment each 30 June for how a fund must claim ECPI in the next year

Also applies in first year of the SMSF

SMSF will have disregarded small fund assets for the next financial year if:

At 30 June a member was in retirement phase and had over $1.6m total super balance

In next financial year the SMSF has a member in retirement phase at any time

If have disregarded small fund assets:

Fund is not eligible to use the segregated method for tax purposes

Claim ECPI using the proportionate method and obtain an actuarial certificate

Disregarded small fund assets

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Capital gains and losses A fund solely in retirement phase over entire income year

Without DSFA: the fund is deemed to have segregated pension assets and will disregard gains

and losses under Section 118.320 of ITAA 1997

With DSFA: the fund must use the proportionate method but assets are solely producing exempt

income and so gains and losses will be disregarded under Section 118.12

The timing of when capital gains or losses occur does not impact how they are taxed

Gains and losses are disregarded and are not included in assessable income

Do not use up carried forward capital losses

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JR Super Fund Joe is now completing the tax return for JR Super Fund for 2018-19

Joe is in retirement phase for the entire year and makes a minimum pension payment

$80,000 in assessable income in 2018-19

$20,000 net capital loss

$6,500 in general administrative expenses, $300 in deductible expenses

There is $2,000 in tax losses carried forward from last year

Segregated method to claim ECPI? Disregarded small fund assets?

... it depends on Joe’s TSB at 30 June 2018

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JR Super Fund: Joe has no other superTSB at 30 June 2018 of $1.58m with a retirement phase account

JR Super Fund does not have DSFA

Claim ECPI using the segregated method

Segregated method for ECPI:

Disregard $20,000 capital loss

ECPI = assessable income = $80,000

No other assessable income, skip Section B: Income

in the annual return

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JR Super Fund: Joe has no other superOther 2017-18 tax items:

Deductible expenses = $300

Non-deductible expenses = $6,500

Net ECPI = 80,000 – 6,500 = $73,500

Tax loss deduction = max(0, 2,000 – 73,500) = 0

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Joe has TSB at 30 June 2018 of > $1.6m with a retirement phase account

JR Super Fund does have DSFA

Obtain an actuary’s certificate and claim ECPI using the proportionate method

Proportionate method ECPI:

Disregard $20,000 capital loss

ECPI = assessable income x exempt proportion

= 80,000 x 1.000 = 80,000

Skip Section B: Income in the annual return

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JR Super Fund: Joe has $1.5M in another SMSF

Maintaining segregation A fund had a momentary accumulation balance in the year:

Commence a pension on 1 July with entire accumulation balance

Receive a contribution and immediately commenced a pension

Complete a partial commutation and immediately withdraw it from accumulation

Could mean a fund is not segregated at that time…

ATO view: a matter of documentation as to whether requires an actuarial certificate

If no income earned while in accumulation the segregation is maintained

Example: a minute that says ABP commenced immediately with the entire contribution

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A fund solely in retirement phase over an entire year

Use the segregated method to claim ECPI if fund does not have DSFA for the year

Use the proportionate method to claim ECPI if fund does have DSFA for the year

A net capital gain will be disregarded (100% exempt)

A net capital loss will be disregarded (cannot carry forward loss)

General administrative expenses are not deductible

Tax losses carried forward must be offset by net ECPI before claiming as a deduction

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A fund with periods solely in retirement but at other times has a non-retirement phase account

Smith Super Fund

Smith Super Fund June is the sole member of the Smith Super Fund. She inherited a lot of wealth from her family, most of which is outside the SMSF.

She had SMSF assets of $1,480,450 at 1 July 2018

She does not work and has not contributed for many years

June’s partner Roger recently retired and suggests to June that she

commence an ABP when she met her preservation age in March 2019, and

puts more of her savings into super, starting with a NCC of $100,000 in June.

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MEE

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Deemed segregation If assets are solely supporting retirement phase accounts at a time, then those assets are deemed to

be segregated pension assets at that time if the fund does not have DSFA

Not necessarily documented in the fund’s investment strategy

Can have multiple periods of deemed segregation in a year

Must use segregated method to claim ECPI from 2017-18 onwards

ECPI calculations prior to 1 July 2017

ATO will not review calculations where a fund used the proportionate method over entire year even if

there were periods where the fund was solely in pension

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Does Smith Super Fund have DSFA? June is the sole member of Smith Super Fund

Balance of $1,480,450 at 1 July 2018 in accumulation

Commenced an ABP 23 March on her 57th birthday with her entire balance of $1,471,518

Made a $100,000 non-concessional contribution and pension payment on 1 June

She has no other superannuation accounts

Does the fund have disregarded small fund assets in 2018-19?

Would your answer change if her 30 June 2018 balance was over $1.6million?

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No

No

Turn 57 and commence ABP

Deemed segregation

Non-concessional contribution received

Accumulation phase

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2Segregated

method

1Proportionate method

3Proportionate method

Your actuary needs to know the

account balances at the end of

segregated periods35

2nd

accounting period

Income: $17,301

1st accounting periodIncome: $45,510

3rd accounting period Income: $24,500

Deductible expenses: $500General admin expenses: $2,000

Smith Super Fund calculating ECPI

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ECPI = segregated method ECPI + proportionate method ECPI

Segregated method ECPI = $17,301

Proportionate method ECPI = 0.10002 x (45,510 + 24,500) = $7,002.40

ECPI = 17,301 + 7,002.40 = $24,303.40

Smith Super Fund expenses Expenses relate to all fund assets

Are not distinct and severable

Total deduction = 500 + (deductible proportion x 2,000)

Actuarial method using (1 – exempt income proportion) is no longer fair and reasonable

1 – exempt income proportion = 1 – 0.10002 = 89.998%

89.998% of all fund assets are not producing assessable income

Actuarial calculation does not include segregated assets and overstates a fair deduction

Need to allow for all fund liabilities, including segregated assets…

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Smith Super Fund expenses June uses the expense deductibility proportion in her actuarial certificate that takes into

account all fund liabilities

Allows for the deemed segregated periods and periods where assets not segregated

Expense deductibility proportion 72.818%

Total deductions = 500 + (0.72818 x 2,000) = $1,956.36

Total non-deductible expenses = (0.27182 x 2,000) = $543.64

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Capital gains and losses

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A fund fund with some periods in the income year where assets are solely supporting retirement phase,

and other periods where is a non-retirement phase balance

With DSFA: irrespective of when gain/loss incurred net capital gain will have actuarial exempt income

proportion apply and net capital loss can be carried forward

Without DSFA: timing is important

A gain or loss incurred when solely in retirement phase = disregarded

When not solely in retirement phase: a net gain has actuarial exempt income proportion apply and a

net loss is carried forward

Smith Super Fund In 2018-19 June commenced pension for the first time

Smith Super Fund did not have DSFA and is eligible to use the segregated method

June planned to sell an asset to provide the fund with cash to make pension payments

Capital gain on a property owned by the fund will be significant at about $300,000

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+$$

Sells property for large capital gain prior to retirement

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+$$

Sells property for large capital gain after commence pension

Think strategically:

Sell in deemed period to

maximise exempt capital gain

Defer contribution to extend

deemed period, or immediately

commence pension

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+$$

Sells property for large capital gain If June had a pension outside SMSF

such that she did have DSFA

Cannot use segregated method

Exempt income proportion

applies to gain irrespective of

when received

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Disregarded small fund assets Trustee has no choice and must use proportionate method to claim ECPI

Applies to 2017-18 financial years onwards

A fund can move in and out of disregarded small fund asset status each year

A new member joining the fund could impact current year’s status

Implementing this administration requirement:

You need to know all member’s TSB each 30 June

Important to know if a fund has DSFA when planning to realise capital gains or losses

May also impact the deduction that can be claimed on fund expenses

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A fund with periods solely in retirement phase, but at other times has non-retirement phase account If the fund has DSFA

Must use proportionate method to claim ECPI

Net capital gain has exempt income proportion apply, net capital loss can be carried

forward, irrespective of timing of gains and losses

Expenses that are not distinct and severable must be apportioned

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A fund with periods solely in retirement phase, but at other times has non-retirement phase account If the fund does not have DSFA

Must use segregated method in periods where deemed to be segregated and can use proportionate method

to claim ECPI in other periods

A net capital gain or loss in a deemed period = disregarded (100% exempt)

A net capital gain where assets are not deemed segregated will have actuarial exempt income proportion

apply, a net capital loss will be carried forward

General administrative expenses relating to segregated assets = non-deductible

General administrative expenses which must be apportioned = use a fair and reasonable method based on all

fund assets 48

When is an actuary’s certificate needed?Keep our flow charts on hand to understand when a fund needs to use the proportionate vs segregated method

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A fund which always has a non-retirement phase account during the year

A fund which is solely in retirement phase over the whole year

A fund which has periods where it is solely in retirement phase but at other times also has a non-

retirement phase account

A fund with assets elected to be segregated 50

Understand the ‘type’ of fund you have

ECPIAdvice

Accounting

Audit

Capital gains & losses Tax losses

Expenses

Government proposed two red tape reduction measures in 2019-20 Federal Budget:

1. Fix anomaly where some funds solely in retirement phase require an actuarial certificate

SMSF in retirement phase where member balances grow above $1.6m could claim ECPI without an actuarial certificate

2. Allow trustees to choose method for calculating ECPI

Remove deemed segregation

Can still choose to use the segregated method by documenting assets as segregated pension assets

Changes due to commence from 1 July 2020 – we await draft legislation

Are more changes coming?

Contact us

The information in this presentation has been prepared by Accurium Pty Ltd ABN 13 009 492 219 (Accurium). It is general information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. Whilst all care is taken in the preparation of this presentation, no warranty is given with respect to the information provided and Accurium is not liable for any loss arising from reliance on this information. Scenarios, examples and comparisons are shown for illustrative purposes only and should not be relied on by individuals when they make investment decisions. We recommend that individuals seek professional advice before making any financial decisions. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.

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